The present invention is in the general field of private capital financing and pertains, in particular, to a method of identifying potential targets (i.e., buyers, investors, or sellers) for a capital transaction.
In the past several years, the amount of private capital from, e.g., private capital funds (“capital firms”) or other, institutional, investors has increased tremendously. Additionally, investors in private capital funds have experienced growth in total assets under management and distributions from prior investments in capital firms, all of which must be reinvested. Finally, service companies such as commercial banks, investment banks and consulting firms have generated an increasing amount of business from capital firms and therefore have increased their investments in capital firms to strengthen those relationships.
The additional capital has created a challenge to capital firms in keeping pace with investing the total capital supply available to them. This oversupply of capital is having a profound effect on the market and on the ability of capital firms to generate high returns. As the supply of capital increases, the rate of return decreases. To maintain a high level of return, capital firms have increased their risk profile to achieve those higher returns. Many of these capital firms have become industry focused and employ such techniques as consolidation or add-on acquisitions. Consolidations consist of buying several smaller companies in the same field and creating a single larger entity with greater capability than the individual companies had. Add-on acquisitions comprise starting with a single mid-sized company and adding several smaller companies to achieve one large company.
Add-on investments are very attractive because they benefit both the buyer and the seller. From the buyer's perspective, add-on investments allow the buyer to purchase smaller companies less expensively, relative to larger companies, keeping the average cost for the entire company down. Additionally, cost savings and revenue enhancements can be achieved due to the synergies of the multiple add-on investments. Finally, the larger company presents the buyer with better exit options and better exit pricing.
The market for small companies is currently inefficient because capital firms' emphasis on small companies on a stand-alone basis or as add-on acquisitions is relatively low and advisers to small and venture stage companies are typically unsophisticated in add-on opportunities and buyer identification in general. Full service investment banks and the larger capital firms simply are unaware of many of the smaller deal, add-on acquisition opportunities that are available. The small fees involved do not motivate investment banks to take on small and venture-stage companies as clients. Therefore, there is a need for a method of doing business whereby these small companies which are not attractive to the large investment banks can acquire growth capital or be sold. A method is required whereby the sources of capital willing to invest in such markets can be efficiently matched with those companies that are either seeking additional capital or are interested in selling the entire operation to a third party. Additionally, a method is required to generate additional investment opportunities to present to capital firms. Additionally, a method is required to present such opportunities to capital firms and facilitate resulting transactions. Finally, a method is required whereby potential targets (i.e., buyers, investors, sellers, or acquisition targets) for a capital transaction can be identified on the basis of relevant criteria or characteristics.